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DRI-WEFA Study Identifies Venture Capital as a Key Factor Powering U.S. Economic Growth
Dollar for Dollar, VC-Backed Companies Have More Than Twice The Economic Impact As The Average Non VC-Backed Public Company; Contribute Disproportionately to Revenue Growth, Tax Receipts, Exports and R&D
Washington, DC, June 26, 2002--Venture capital, through the operation of thousands of companies that have received venture financing, is one of the most powerful growth engines of the U.S. economy, DRI-WEFA, one of the world's leading economic consulting firms, revealed today.
Reflecting its analysis of the universe of all venture capital-financed companies over the period 1970-2000, DRI-WEFA said that venture capital-backed companies had approximately twice the sales, paid almost three times the federal taxes, generated almost twice the exports, and invested almost three times as much in R&D as the average non-venture capital-backed public company, per each $1,000 of assets.
The study also showed that in addition to its well-understood role as the lifeblood for high technology advances, venture capital financing was responsible for innovation across a broad swath of the U.S. economy, including biotechnology, consumer products, retailing, construction, transportation, industrial, financial services and forestry.
"We knew that venture capital was a significant factor in the growth of U.S. economy, but we were unprepared for the extent to which it is the 'special sauce' for growth," said Andrew Hodge, Group Managing Director of DRI-WEFA. "The study shows that the impact of venture capital is extraordinary in terms of the contributions of VC-backed companies to many determinants of the nation's economic vitality including R&D spending, new industry creation, tax revenues, and job growth, especially high skilled jobs."
The economic data released today includes the results of the third and final phase of a DRI-WEFA study commissioned by the National Venture Capital Association. The earlier findings, which were released in 2001, showed that 11 percent of US GDP and one-out-of-every nine jobs in 2000 was generated by an originally venture-backed enterprise.
The DRI-WEFA data will be released at a Capitol Hill program sponsored by the Congressional Economic Leadership Institute. Representative Anna Eshoo (D-Palo Alto, CA) who will participate at the event, remarked:
"At a time when Americans are concerned about the nation's economic recovery, understanding the key sources of economic growth has never been more important. This study shows that venture capital is one of the key ingredients to fuel our economic engine, one that differentiates us from other developed economies whose job creation has not kept pace with ours. We must do everything possible to foster an environment where this type of risk-tolerant, growth-oriented investment continues to thrive."
Venture Capital Boosts GDP and Creates Jobs
As reported last year, venture capital-funded companies contributed nearly $1.1 trillion to GDP and directly accounted for 12.5 million jobs in 2000. More than half of these jobs were in the manufacturing and retail sectors. If supporting businesses that deliver goods and services to these venture-backed companies were also included in the total, the jobs number increases by a multiplier of 2.2, translating to 27 million jobs, a staggering percentage of total US employment.
VC-Backed Companies Outperform Non-Venture-backed Companies
In addition to generating jobs and revenues, companies that were originally venture-backed outperformed other public companies on a relative basis across a number of economic measures. For every $1,000 in assets, between 1980 and 2000 venture-backed companies generated more sales, paid more taxes, produced more exports and invested more in research and development.
Contribution per $1000 in assets between 1980 and 2000
|
|
Sales |
Federal Taxes |
Exports |
R&D |
VC-Backed Companies
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$634
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$14
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$138
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$44
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All Public Companies
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$391
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$ 5
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$ 72
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$15
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Source: DRI-WEFA
|
|
|
|
|
In 2000, originally venture-backed companies paid $58.8 billion in federal taxes, exported goods and services worth $21.7 billion and spent $157.3 billion on research and development.
Mark Heesen, President of the National Venture Capital Association offered insight as to why venture-backed companies outperform the market in terms of contribution.
"The corporate culture at a venture-backed company is an energized culture in which management is intensely committed to the success of the organization," said Heesen. "Further, the involvement of a venture capitalist in the early stages of the company sets a level of discipline that does well by the company in future years. These factors, combined with a commitment to R&D and breakthrough innovation, gives the venture-backed organizations that make it to the public markets an edge."
Venture Capital Supports Innovation Across The Board
Venture capital played a key role in funding technological progress, investing $192 billion in the high tech industry from 1995-2000. During this time, venture capital investment rose substantially in communications, computer software and services, and online specific sectors. Yet, a great deal of innovation was fostered by venture capital across a diverse set of industry sectors. Originally venture-backed companies such as Boise Cascade, Costco, Fischer Scientific, and Mellon Financial Corporation generated patents and innovative business processes in the forestry, retail sales, transportation, biotechnology and financial services sectors respectively. Venture capital also has contributed to improving the quality of life for many Americans by investing in the medical / health sector. Medtronic, the company to develop the first implantable pacemaker, was an originally venture-backed company.
Venture Capital Helps Create "Industry Clusters"
The DRI-WEFA study also revealed that venture capital played a significant role in the creation of industry clusters. By funding the leading company within an emerging cluster, venture capital fosters a concentration of expertise and talent in that entity. When employees inevitably branch out to form their own businesses, a cluster of similar businesses with distinctive experience emerges. Examples of these clusters include:
| Industry Cluster |
Original Venture-Backed Company |
Overnight delivery
|
Federal Express |
Retail superstore
|
Home Depot and Staples
|
Online computer sales
|
Dell Computer
|
Internet service
|
AOL
|
Computer operating Systems
|
Microsoft
|
Biotechnology
|
Genentech
|
|
|
Source: DRI-WEFA
Venture Capital Fosters Local and Regional Economic Growth
While more than half the nation's venture capital disbursements are concentrated in the top five states, every state that has received a venture infusion has benefited. The study shows a strong correlation among state venture capital activity and that state's gross state product (GSP) and average annual wages. Seventy five percent of the top twenty states for venture capital investment in 2000 mirror the top states for GSP for that year.
Top States by VC Disbursement in 2000
|
Rank
|
State
|
2000 Disbursements
|
1
|
California*
|
$41.9 billion
|
2
|
Massachusetts*
|
$9.4 billion
|
3
|
New York*
|
$6.8 billion
|
4
|
Texas*
|
$5.8 billion
|
5
|
Colorado*
|
$4.9 billion
|
6
|
New Jersey*
|
$3.6 billion
|
7
|
Virginia*
|
$2.9 billion
|
8
|
Washington*
|
$2.8 billion
|
9
|
Georgia*
|
$2.5 billion
|
10
|
Maryland*
|
$2.4 billion
|
11
|
Illinois*
|
$2.3 billion
|
12
|
Florida
|
$2.2 billion
|
13
|
Pennsylvania
|
$2.1 billion
|
14
|
North Carolina
|
$1.8 billion
|
15
|
Connecticut*
|
$1.8 billion
|
16
|
Washington DC*
|
$1.2 billion
|
17
|
Minnesota*
|
$1.1 billion
|
18
|
Oregon
|
$1.1 billion
|
19
|
Missouri
|
$760 million
|
20
|
New Hampshire*
|
$696 million
|
Source: DRI-WEFA and Venture Economics
* Indicates the state also falls within the top 20 for GSP per capita.
Robert Grady, Managing Partner of Carlyle Venture Partners, a part of The Carlyle Group, who will be speaking at the CELI event, remarked, "The availability of risk capital has been one of the single most important factors driving the strong performance of the U.S. economy over the past two decades--both nationally and in specific regions. Northern California and northern Virginia are examples of regions that have experienced very strong growth because of the investment that has been made in young companies. Keeping the environment conducive to more investment should be top of mind for both the national and local governments."
Venture Capital is An Ally of "Job Churn"
The study asserts that venture capital nurtures the most dynamic sectors of the economy, creating highly skilled jobs in emerging industries. This contribution supports the process of „creative destruction‰, a phenomenon in which market economies continually renew themselves by the churning of jobs and businesses throughout industry sectors. While this phenomenon fosters growth and innovation and raises the standard of living for the country, it has also resulted in a mismatch of skills between employees being released from declining sectors and those needed in faster growing ones. Consequently, employment bottlenecks are occurring as highly skilled sectors grow faster than the available workforce. This challenge is known as bottle necking. To address this issue, the venture capital community has long been a proponent of job re-training and education reform.
About the Study
DRI-WEFA constructed two databases consisting of 16,278 venture capital financed companies to estimate the annual contribution of the venture capital industry to the US standard of living over the last 30 years. The contributions of venture-backed companies are based on estimated average annual values for sales, taxes, net income, employment, export sales and R&D expenditures. For a copy of the report, please contact John Taylor at 703-524-2549 ext. 17 or by e-mailing jstaylor@nvca.org.
DRI-WEFA, (http://www.dri-wefa.com), a subsidiary of privately held Global Insight, Inc., provides the most comprehensive economic coverage of countries, regions and industries available from any source. DRI-WEFA brings a unique combination of expertise, models, data and analytical software together with a common analytical framework and a consistent set of assumptions. DRI-WEFA collects and delivers financial information to clients and also provides a broad range of consulting capabilities covering market analysis, business planning, investment strategy, risk assessment, infrastructure analysis, policy evaluation, and economic development. The company has over 3,000 clients in industry, finance and government around the world with $70 million in revenues, over 500 employees and 23 offices in 12 countries covering North and South America, Europe, Africa, the Middle East and Asia.
The National Venture Capital Association (NVCA) represents over 450 venture capital and private equity organizations. NVCA's mission is to foster the understanding of the importance of venture capital to the vitality of the U.S. and global economies, to stimulate the flow of equity capital to emerging growth companies by representing the public policy interests of the venture capital and private equity communities at all levels of government, to maintain high professional standards, facilitate networking opportunities and to provide research data and professional development for its members.
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